The Z tranche starts receiving interest and principal payments only after the other tranches in the CMO have been fully paid. IO holders are only entitled to the actual amount of interest paid, as it is paid, on a pool of mortgage collateral. mortgage servicing rights). If some of the mortgage loans go delinquent or default, funds from the excess spread account can be used to pay the bondholders. The construction of a floater/inverse can be seen in two stages. In the example, the 8% coupon of the '8 off 6' is cut into a floater coupon of:

Congress established Ginnie Mae in 1968. The first stage is to synthetically raise the effective coupon to the target floater cap, in the same way as done for the PO/Premium fixed rate pair. Therefore, the inverse coupon is 're-notionalized' to the smaller principal amount, in the example this is done by multiplying the coupon by ($75mm /$25mm) = 3. An interest only (IO) tranche may be carved from collateral securities to receive just the interest payments from a pool of mortgages. Ginnie Mae, for example, guarantees the timely payment of principal and interest on its mortgage-backed securities, and its guarantee is backed by the “full faith and credit” of the U.S. government. This type of tranche supports other tranches by not receiving an interest payment. In return for this loan, the bondholder receives interest, generally in semiannual payments, until the bond is redeemed.Although MBS typically entitle investors to payments of principal and interest, they differ from corporate and Treasury securities in important ways.5 This is because the GSE, or servicer in the case of Ginnie Mae loans, will repurchase the loan at par from the collateral poolThe minimum investment for a mortgage-backed security varies according to the structure of the offering, but most securities sold to individual investors require a minimum investment of $1,000. In particular The construction of CMO Floaters is the most effective means of getting additional market liquidity for CMOs. more Ginnie Mae Pass-Through It is also known by the acronym GNMA. For example, mortgage pass-through securities generally appeal to investors with a longer investment horizon.

The increased effective duration must balance the matching IO's negative effective duration to equal the collateral's effective duration, or 2. In the example: Examples of commonly securitized assets include:Individually, these assets could be difficult and inefficient to sell or trade. If the mortgage-backed security is not guaranteed by an agency or GSE, it is classified as private label or “non-agency.”Ginnie Mae is a U.S. goverment-owned corporation within the Department of Housing and Urban DevelopmentFannie Mae and Freddie Mac generally guarantee timely payment of both principal and interest on their mortgage-backed securities whether or not the payments have been collected from the borrowers. For example, an NAS bond might be protected from prepayments for five years, and then would receive 10% of the prepayments for the first month, then 20%, and so on. The principal (and associated coupon) stream for CMO collateral can be structured to allocate prepayment risk. The resulting asset-backed security (ABS) can then be sold to, and traded by, investors in the capital markets.Nearly any asset can be securitized if it generates a cash flow.

For example, if the weighted average interest rate of the mortgage pool is 7%, the CMO issuer could choose to issue bonds that pay a 5% coupon. Some classes receive less risk of a particular type; other classes more risk of that type. Excess spread is a very effective mechanism for protecting bondholders from defaults that occur late in the life of the deal because by that time the funds in the excess spread account will be sufficient to cover almost any losses. If this occurs, the next class of bonds absorb credit losses, and so forth, until finally the senior bonds begin to experience losses. Contact your financial professional to discuss whether investing in MBS or CMO is for you. A NAS tranche receives principal payments according to a schedule which shows for a given month the share of pro rata principal that must be distributed to the NAS tranche. Rather, it is reallocated among the different classes. One feature of CMO floaters that is somewhat unusual is that they have a coupon cap, usually set well out of the money (e.g. The lender decides to whom to sell the security and then submits the documents to Ginnie Mae’s pool processing agent. Bonds with lower coupons usually have higher effective durations, and a PO has no [zero] coupon. The borrower typically repays the mortgage loan in monthly installments. Your own investment priorities, risk tolerance and other individual factors should be considered before making any investment. Therefore, IO securities are annuity-like securities but the amount and timing of payments is uncertain as payments are based on the total interest payments paid on all the underlying mortgages in the collateral pool. The principal of the premium SEQ is calculated as (6 / 6.5) * $100mm, the principal of the PO is calculated as balance from $100mm. A CMO is essentially a way to create many different kinds of bonds from the same mortgage loan so as to please many different kinds of investors. GSE guaranteed loans can serve as collateral for "Agency CMOs", which are subject to interest rate risk but not credit risk. Since the IO tranche has negative duration, a PO typically has more effective duration than its collateral. A special class of IO/POs generated in non-agency deals are WAC IOs and WAC POs, which are used to build a fixed pass through rate on a deal. This type of tranching has a bond (often called a PAC or TAC bond) which has even less uncertainty than a sequential bond by receiving prepayments according to a defined schedule. The inverse formula is simply the difference of the original premium fixed rate coupon less the floater formula.